Make financial planning as easy as 50/20/30

Not having a plan is a plan, says von Tobel, it's just a really bad plan

Alexa von Tobel, founder and CEO of financial planning program LearnVest.com and author of "Financially Fearless," wants you to have a financial plan.

While hardly remarkable advice from a financial guru, what makes von Tobel's prescription different is its simplicity. For example, a basic principle of her LearnVest program is the 50/20/30 rule. Clients are advised to spend no more than 50 percent of their paycheck on rent, utilities and other essential expenses. The next 20 percent of their pay goes to saving for the future, such as contributions to retirement and investing accounts. Clients can spend the last 30 percent on anything they want.

ALEXA VON TOBEL, AUTHOR,
'FINANCIALLY FEARLESS'

In Alexa von Tobel's best-selling book, "Financially Fearless," she simplifies financial planning with a quick and easy method for spending, saving and even having something left over for fun.

Von Tobel's company, LearnVest, pairs customers with Certified Financial Planners who help them get their finances under control. The company offers three levels of participation at different price points.

CreditCards.com talked to von Tobel about why she decided to help people with financial management and how she and her company are making a difference.

Q: How old were you when you started thinking seriously about money?

A: I always was involved with my own finances. I was always trying to learn and trying to figure it out. I went to Harvard and never got to learn about it. I thought I just wanted to be informed, but I kept making mistakes. I thought, "Wow, there are not a lot of great places to go to tell you what you should be doing."

Q: Why did you start the LearnVest program?

A: I wished the program existed for me. I believe financial advice should be a consumer product. We made getting consumer advice easy and affordable. It's as easy as getting a gym membership.

Q: What's the most important thing you'd like to tell people about money?

A: I'd like to tell them that not having a plan is a plan. It's just a really bad plan. It's a decision, but it's not going to get you anywhere healthy.

Q: People know they need to control their spending, they know they need to get out of debt. What's the missing piece of the puzzle for many of them?

A: One of the biggest pieces of the puzzle is that, in general, people are juggling so many different balls -- debt, kids, retirement. The real key is that they don't know how to prioritize. A financial plan gives you a priority order for every dollar.

Q: How have you gotten in touch with people and their anxieties with money?

A: I sat in on a few hundred focus groups over the years. We have thousands of clients who we talk to. I myself was client No. 1. I was concerned and didn't know what to do.

Q: Why do you think people feel so anxious about money?

A: Money matters. It's a lifeline; for instance if you want to travel, if you're sick. It's not about having as much as possible. Money is this incredibly important lifeline, and yet we're not educating people about a topic that really, really matters. People have a really bad understanding about what's really happening. They know they don't know, and it tends to paralyze them.

Q: How can your book help people in a way that other personal finance books cannot?

A: With every book you get a free assessment, so you can get on the phone and talk to one of our planners. I wanted people to be able to talk to someone. Everyone has questions, so we help you to get your questions answered. It's actionable.

Q: The 50/20/30 rule is your central money managing principle. Does it seem out of reach to many people -- just 50 percent of take-home pay for essentials, 20 percent for the future and still 30 percent for lifestyle?

Money takes dedication and conquering a lot of fears. You have to be willing to do hard things to make progress.

A: Think of the 50/20/30 as a quick blood check. I didn't make it up. It's a financial planning principle. What it really comes down to, if your 50 percent is way over, it's almost guaranteed that you're not going to be able to save enough for retirement.

We have something even better than the 50/20/30 rule, called your "one number." You need to know that you're safe to spend your "one number" every month. We make the financial plan for you. We send every single dollar exactly where it should go, and then we pause and we give you a single number. It's incredibly clear. You can spend this number on fun, on anything.

Q: Are there exceptions to the 50/20/30 rule? What if people say they can't get their spending on essentials down to 50 percent of take-home pay?

A: We get pushback. People say, "But we live in New York City," or "We live in San Francisco," and we say it's still important to keep your rent at 30 percent. We really want you to be in a position to save for the future.

Q: What about during times of crisis, such as when one spouse is on unemployment?

A: Everyone can make progress on their money. We believe getting started is the most important thing you can do. If you're getting started in a crisis, that's OK. We can service you and figure out what you should be doing.

Q: If a person can't meet the 50 percent rule because their housing expenses are too high, should they move?

A: We don't recommend you move immediately. Are there other trade-offs you can make? If your mortgage is extremely over budget, you'll have to figure out a game plan.

Q: You recommend that you save every $5 bill that comes into your hands. I've never heard of that. Did you come up with it?

A: I don't think it's a revolutionary idea. It's a little behavioral trick. It's such a simple habit, but it's a good habit.

Q: What do you think is the biggest financial mistake people in their 20s make?

A: I think that they don't pay down their credit card debt fast enough. They overspend right out of school because they don't have a really clear sense of what their budget should look like.

Q: Your book talks a lot about the psychology of money. Do you think this is an area often ignored?

A: I think that the psychology of money is really important. We talk about and think about the psychology of working out and exercise on a regular basis. Money takes dedication and conquering a lot of fears. You have to be willing to do hard things to make progress. You can't ignore it. For the average person, if you grew up in a family where money is talked about and it's really stressful, you think of money as a topic of great stress. If you grew up where people had a transparency and you could talk about it, money's just an ingredient in your life.

Published: August 6, 2014

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